CRISIL to launch complexity levels

In an initiative aimed at strengthening Indian capital markets through greater transparency for investors, CRISIL will classify capital market instruments based on their complexity. The voluntary and pro-bono basis initiative, first of its kind in the world, will be launched by finance minister P Chidambaram later this month.

A survey conducted by CRISIL amongst the retail and institutional investors revealed that many investors do not fully understand the intricacies of all financial instruments in the market. This is especially true for the newer, more complex instruments, such as capital protection-oriented mutual fund schemes and equity-linked debentures.

CRISIL's complexity levels will reflect the ease of understanding and analysing the risk elements in such instruments. Roopa Kudva, managing director and CEO, CRISIL said in a statement, "The complexity levels will help the investor determine the degree of sophistication and due diligence required to understand the risk factors involved in an instrument. This will assist the investor in making an appropriate decision, based on his or her understanding of the complexity of the instrument."

The company will use four parameters like ease of calculation of payout and returns, clarity on timing of cash flows, number of counterparties involved in the transaction, and familiarity of market participants with the instrument to determine the complexity of a financial instrument.

The complexity levels will be updated every six months, to bring in new instruments or change classifications of instruments for reasons such as increasing market familiarity with a particular type of instrument.